The new Governor of the Bank of England has signalled that he will put growth at the heart of his approach to the job and is willing to see higher inflation for longer in order to support the economy.
He said that, although price stability was central, there were “tolerances” concerning the speed with which inflation would be brought down if the economy was struggling.
At the moment inflation is running at 2.7pc, which is above the 2pc target set by the Government.
Some economists believe that the Bank of England’s loose monetary policy is contributing to inflationary pressures and have called for an increase in interest rates.
Others argue that, while the economy is flat-lining and state spending is being curtailed, a fiscal consolidation, interest rates should remain low.
“If you are coming from above [the inflation target] and you have a fiscal consolidation you might take a little longer to get back given the issues with output,” Mr Carney told the World Economic Forum in Davos.
“Once the goal is set, the central bank needs to make that determination and there needs to be an understanding of the goals set and of the tolerances that the central bank can operate in.”
Using the US as an example, Mr Carney said economies needed to be allowed to reach an “escape velocity” in which they were out of danger of slipping back into recession.
That would suggest keeping interest rates lower for longer while considering further quantitative easing, indirect provision of monetary stimulus via the financial system.
In the UK, despite some quarters of growth, the economy has regularly slipped back into negative territory.
“As the economy gains traction — within the context of price stability — the stimulus is continued to be provided entirely appropriately to ensure the US economy achieves escape velocity,” Mr Carney said.
He added that monetary levers had not been “maxed out or taken to the hilt”.
“There continue to be monetary policy options in all the major economies,” he said, while pointing out that central banks could not do the job on their own.
“There is not an ability for central banks to take all the risks out or set the seeds for a sustainable recovery.”
Mr Carney made it clear that any change in the remit of central banks was up to governments and not the governors themselves.
After a speech last month, some suggested that Mr Carney might be considering pushing to change the UK’s 2pc inflation target to a nominal gross domestic product target.
Nominal GDP strips out the effects of inflation and some argue it puts growth more prominently on the Bank’s agenda.
“It is a decision of the Government,” he said of any change in the Bank’s remit.
“The operational independence [of the central bank] is paramount, in order to achieve the mandate that has been given.”
He also laid out the priorities for central bankers until 2015, stressing the importance of ending the situation where some institutions were “too big to fail”. He said: “The next two years will be decisive in finishing the job on both Basel capital and liquidity and crucially on 'too big to fail’.”
He added: “Equally important is the forgotten bit of reform, which is addressing shadow banking [such as] over-the-counter derivatives.
“These are the areas that absolutely amplified the last crisis and will do so again unless we complete our agenda.”